Dear Savvy Senior,

Can you tell me about a new financial product called longevity insurance? With longevity running in my genes- dad lived to age 94 and mom's 92 and still going strong- I worry about outliving my money.

Long Living Larry

Dear Larry:

Outliving one's retirement savings is a financial nightmare that haunts many retirees. That's why a handful of insurers have recently introduced a new type of annuity that caters specifically to that fear. Here's what you should know.

Longevity Insurance

Now you can actually buy insurance that pays you for living a long life. It's called "longevity insurance", and like an annuity, it pays you income for life, but only if and when you make it to a certain age. How does it work? You give an insurance company a lump sum of money when you retire, say, age 60 or 65, in return for monthly income starting at age 80 or 85.

Advantages

The advantage of choosing longevity insurance over an annuity is that the payouts are much higher. For example, a 65-yearold man who puts $50,000 into a longevity policy can expect to receive around $3,400 per month (that comes to $40,800 per year) starting at age 85. With a traditional income annuity, he'd get only around $640 per month. Why such a big difference? Because the insurance companies are betting you won't be around to collect. National statistics show that a 65-year-old male will live, on average, to 82, and a 65-year-old woman to 85. Another great benefit with longevity insurance is it gives you the freedom to spend down your nest egg, knowing you've locked up an income stream for your later years.

Drawbacks

As tantalizing as those big payouts may be, longevity insurance has its drawbacks. For starters, a basic longevity policy offers no escape hatch for you to retrieve your money during the 20 years or so you're waiting for benefits to start. And your heirs won't get death benefits if you die before you begin to collect.

Recognizing that many people might balk at these limitations, insurers are also offering add-ons to the basic policy that include a death benefit to be paid to heirs, early payments for nursing home care, cash withdrawal options and inflation protection. The downside, however, is that every piece you add on reduces your monthly benefit.

When To Buy

Most people purchase longevity insurance at or just prior to the time they retire. Figure out how much of your essential expenses you can cover with Social Security, pensions, and other forms of guaranteed income and consider buying coverage for the rest. But don't overdo it! Experts recommend you use no more than 10 to 15 percent of your assets to purchase a policy and leave the rest in your portfolio to provide income until it kicks in. Also, when choosing a product, remember that you're buying income that will not kick in for 20 years or more. So be sure to go with a company with a good reputation and solid financials. Some major players offering this type of insurance are MetLife, Hartford, Integrity and New York Life.

Alternatives

If you don't like the idea of longevity insurance, you could always invest the money that you would spend on this type of insurance on your own and come up with a similar result. If you took your $50,000 and invested it at age 65, for example, assuming a conservative 6 percent growth per year, you would end up with $160,000 in 20 years. At age 85, you could then begin spending the money or use it to buy an immediate annuity. An 85-year-old man who invested $160,000 in an immediate annuity would get about $2,200 per month for the rest of his life. That's a lot less than you'd receive with a longevity policy, but you'd have access to the money for emergencies or to leave to your heirs.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit www.savvysenior.org. Jim Miller is a contributor to "The NBC Today Show" and author of The Savvy Senior books.

The Gazette does not endorse the contents of The Savvy Senior. Check with professionals about the contents of this column.